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Vat Treatment Of The Financial Services: Implications For The Real Economy, Ismail Baydur, Fatih Yilmaz
Vat Treatment Of The Financial Services: Implications For The Real Economy, Ismail Baydur, Fatih Yilmaz
Research Collection School Of Economics
Financial institutions are exempt from the value-added tax (VAT) in most countries. We develop a general equilibrium model with endogenous firm entry and a banking sector to accommodate three key distortions related to exempt treatment: (i) self-supply bias in the banking sector, (ii) under-taxation of payment services, and (iii) input distortions in the business sector and tax cascading. We calibrate our model to the average of Germany, France, and the UK data. Our results show that repealing exempt treatment always increases tax revenues. However, welfare gains occur only at low VAT rates due to the hump-shaped VAT Laffer curve.
Vat Treatment Of Financial Institutions, Ismail Baydur, Fatih Yilmaz
Vat Treatment Of Financial Institutions, Ismail Baydur, Fatih Yilmaz
Research Collection School Of Economics
This paper studies the effects of exempt treatment of financial services under a VATsystem. We develop a general equilibrium model with elastic labor supply, endogenous entry, anda banking sector. The banking sector provides loan services to producers and payment servicesto consumers. Our model display three key distortions under exempt treatment: (i) self-supplybias in the banking sector, (ii) consumption distortions, (iii) input distortions and tax cascading.Then, we calibrate our model to match the salient features of the tax system EU countries. Atax neutral policy regime switch from exempt treatment to full-taxation in loan services improveswelfare about 4%. Shutting down the entry …